You may drive a battered fifteen-year-old Fiesta that sounds like Ivor the Engine when you push it over 60mph, but you’re no different than a Formula One driver – at least when it comes to tax, fines and HMRC.
A Winning Formula?
In 2007, the McLaren team (who dominated F1 in the 80’s and early 90’s but had only won two world championships since) were expelled from the constructors’ championship and fined by the FIA (F1’s governing body) for spying on rival team Ferrari. Faced with a record fine of £49.2 million (including lost TV revenue and travel subsidies), McLaren merrily claimed the huge fine against tax. It was a business expense, they argued; not a statutory penalty but one imposed by a private body.
Unsurprisingly, HMRC disagreed – and McLaren appealed. At the 2012 Tax Tribunal, Akash Nawbatt, a solicitor for HMRC, argued that the fine wasn’t a legitimate business expense because: “The legitimate gathering of information was part of [McLaren’s] trade, but the illicit gathering of information was not. McLaren [admitted as much] to the World Motor Sport Council.”
After disagreement between the case judges, the presiding judge eventually decided in McLaren’s favour, describing the FIA as “a body to whose dictates [McLaren] had agreed to submit as part of its trade and in order to gain income.” The fine, he therefore judged, was “something which arose from its trade, was connected with its trade, and was incurred wholly and exclusively for the purposes of its trade.”
Done and dusted. McLaren drink champagne, HMRC cry in a corner. Yes?
No. Because HMRC appealed, and last year an upper tribunal ruled that the penalty wasn’t incurred “wholly and exclusively for the purposes of McLaren’s trade,” and so wasn’t a tax deductible expense.
More Than Your Job’s worth?
Now if you’re reading this, you’re unlikely to be facing an FIA fine. But what about that parking fine you got last week while plying your trade? Is that a tax deductible expense?
No. ‘A fine incurred as a result of a trader’s infraction of the law is not allowable… as it is not incurred wholly and exclusively for the purpose of the trade,’ says HMRC. In other words, parking is for the purposes of trade; illegal parking isn’t. It’s the same distinction made between McLaren’s legitimate and illicit information gathering. Simple. Isn’t it?
But notice it says ‘infraction of the law.’ If the parking fine comes from a private company, you may be able to claim it against tax (although the HMRC may argue it and want specific details of the circumstances and the fine). Also, if you’re an employer – or ever work an employee – two additional pieces of legislation are worth noting.
Firstly, who pays the ticket – and what about reimbursement?
HMRC statement on parking fines says: ‘The fine will be the employee’s liability if the penalty notice was actually handed to him or her at the time of the offence, or if the employee owns the car. In such circumstances a deduction may be allowed to the employer for the fine paid on behalf of the employee.
But if the notice was fixed to a car owned by the employer, and the employer pays the fine as the registered owner, an employment income charge will not arise to the employee. The fine should then be disallowed in computing the employer’s taxable profit. If the employee voluntarily pays a fine in these circumstances, and the employer reimburses it, the employee will be chargeable to tax the reimbursement as earnings. A deduction for the expense may then be allowed to the employer.’
Secondly, as part of the 1992 Benefits Act, this legislation on ‘pecuniary liability’ (paying a debt incurred by an employee) comes into play:
‘Any payment which an employer makes towards the cost of parking fines incurred by an employee, whether making a payment direct to the employee or paying the fine on the employee’s behalf, must be included in gross pay when assessing Class 1 NICs purposes. The date the payment is made is the date the earnings were paid.’
So if you round the corner and see a traffic warden approaching the car you parked on those double yellows ‘just for five minutes’ – think tax liability before you take another step!